Tuesday, January 31, 2006

Google (GOOG) Analysis

Google, the internet darling, reported its 2005 fourth quarter earnings today. We predicted a solid quarter for Google with many analysts upgrading the stock after this quarter. http://finnews.blogspot.com/2006/01/google-and-search-engine-wars-part-iii.html

Turns out the prediction was wrong as Google failed to meet the analyst estimates for earnings. Google did meet the analyst estimates for revenues. Today's announcement does two things. Google will no longer be a momentum stock and it will drive a certain segment of investors out. Secondly, the earnings slow down is now a given as we move into 2006 and 2007. We will await the analysts to follow-up with reduced earnings target in the next few days.

What the stock does tomorrow and the rest of the week will be interesting. The stock will definitely lose some value tomorrow. It has lost 12% tonight in the after hours trading. It depends on the various mutual funds and other investors on how the stock fares in the rest of the week.

Let us analyze Google balance sheet to see at what price point(s) Google is a buy. The year over year revenue growth rate declined this year(2005) to 92% from 118% from 2004. The expectation is for this to decline to 60-70% range in 2006. The operating income from operations is steady at 34% of revenues compared to the previous quarter after the contribution to Google foundation is added to operating earnings. The stock dilution increased year over year by 11% in 2005 compared to 2004. This is higher than the 6% range we saw in the prior years. The dilution could be higher if the drop in Google stock tomorrow leads to further insider selling.

On another worrying note, the diluted earnings per share declined in the fourth quarter compared to the first quarter even though the revenues increased by 52%. In addition to the stock dilution, the contribution to google foundation and increased income taxe payments also played a role in this. It is not clear if these contributions are a one time event or will repeat in the upcoming quarters.

Assuming that cost and other factors remain the same, the earnings per share in the next fiscal year will be 8.0 to 8.5 dollars per share. Accounting for 10% stock dilution in the next year, the earnings per share will be in the 7.2 to 7.7 range. Taking the low end of the earnings spectrum as a conservative measure, the earnings per share would increase by about 35% from where they are today.

Taking the trailing earnings per share of 5.02, the after hours price for Google is 381 dollars. This gives a trailing P/E of 75 for the stock. The forward P/E for the stock is 52 taking into account the lower end of the earnings per share for next year. Given a growth factor of only 35 in earnings, a more reasonable price for the stock would be 7.2x35 which translates to 252 dollars a share. A more reasonable price would be 7.2x30 which translates to 216 taking into consideration other risks. Even if one gives 10% upward momentum, the stock is a buy in the 225-275 range. This price is reasonable as Google faces further competitive pressures from Microsoft and Yahoo! going into 2007. The growth rate is expected to slow down further into 2007 and 2008 causing the P/E to shrink further.

Although several analysts are predicting the stock to go up to 450 and 500, it is more likely that the stock will touch 300 before hitting 500. Google is a momentum stock and the momentum is currently coming out of the stock. As was the case during the dot com bubble, the stock likely wont fare as well moving forward.

Sunday, January 29, 2006

Nike (NKE) Analysis

Nike is known around the world in the footwear business. However, it does business outside of the footwear business. Nike does business in the apparel and equipment arena in addition to the footwear business.

Nike has been growing at double digit rate for the past several quarters. In fiscal 2005, Footwear revenues were up 11% over last year. Apparel revenues were up 10%. Equipment revenues were up 15%. In the first two quarters of 2006, this trend has continued with revenues growing high single digits or low double digits. ( 8-12% range).

The Nike stock has also responded well jumping from around 40 at end of 2002 to about 80 now. Let us look at the balance sheets to see how things look and to see what management thinks about their earnings in the coming years.

Looking at the 10-Q from November, one can see that the profit margins increased to 13.2% from 12.8% from the comparable period last year. The operating expenses increased year over year but general and administrative expenses declined causing the operating profit margins to slighlty increase. The management estimates the operating margins to remain the same as last year.

The soccer world cup is scheduled for this year in Germany. It remains to be seen if this provides an upward push to the Nike revenues and earnings.

If analyst estimates hold up for Nike and it meets the EPS of 5.77/share in next fiscal year and the prospects continue to look good, if the P/E multiple holds up, the stock will go to $92.00. This is about 12% higher than where the stock is today.

Saturday, January 28, 2006

UGI Corporation (UGI) Analysis

UGI corporation is a distributor and marketer of energy products and services based in Pennsylvania. UGI is a domestic and international distributor of propane and butane. They also market and distribute natural gas and electricity and provide heating and cooling services in the eastern region of the United States.

UGI Corporation is a holding company that distributes and markets energyproducts and related services through subsidiaries and joint venture affiliates. Its subsidiaries principally operate in the following segments.

AmeriGas Propane - UGI owns 44% in AmeriGas who is the largest distributor of propane in the U.S
International Propane - UGI operates in France, Austria and has a joint venture in China
Gas Utility - The gas utility business servers customers in eastern Pennsylvania.
Electric Utility - The electric utility business servers customers in northeastern Pennsylvania. The gas and electric services are regulated by PUC.
Energy Services - The energy services business primarily caters to customers in the eastern united states.

UGI earning margins increased from 2.28% in 2001 to 3.835% in 2005. It has fluctuated between low 3% to high 2% in between. The revenues have grown 98% between 2001 and 2005. They have grown from 2.4 billion to 4.8 billion today. While the propane business is mature and is unlikely to expand further in the existing markets, growth is expected to come from the remaining businesses. The operating earnings have grown 330% in the same period. This shows in the increase in operating margins. The dividends have also grown in this period by 25%.

Since 1999, UGI has changed its business philosophy to the following. From UGI's 10-K,

"Since 1999, our strategic goals have been to grow earnings per share anddividends by focusing on the Company's core competencies as a marketer anddistributor of energy products and services. We are employing our corecompetencies from our existing businesses, as well as using our national scope,international experience, extensive asset base and access to customers, toaccelerate growth in our existing businesses, as well as related and complementary businesses."

As an investor, I like UGI's business strategy. The recent decision to acquire natural gas utility assets of Southern Energy should help bolster UGI's revenues.

The stock sports a healthy yield of 3.2% even given the rise in its price. The P/E is reasonable at 12% with a slight premium to the current growth rate. ( this could change if acquisitions go through ). The mean analyst estimate is 26.75 which still is a 20% premium to last week's closing price. The earnings growth in 2007 is expected to be about 9% higher than in 2006. The debt to equity ratio has also improved marginally over the past several years. Although, it is not guaranteed to reach the analyst estimates, given the stock's history for the past six years, it is likely to do well in the next ten years.

Duke Energy (DUK) Analysis

In this blog, I have been analyzing companies that I was looking to invest in. I have been writing up about the company as I have read their balance sheets. It is my opinion and doesnt represent any one elses opinion or the fit of the stock for investment purposes.

Duke Energy (DUK) is an electric utility. It has a market cap of 26.5 billion dollars. Duke energy primarily operates in the Carolinas. It also has a natural gas transmission division that supplies transportation and storage of natural gas along the U.S. East Coast, the Southeast, and in Canada. It also provides natural gas sales and distribution service to retail customers in Ontario, and natural gas processing services to customers in Western Canada.

In addition to this, the company has a P/E of 17 and a dividend yield of 4.4%. The dividend yield is pretty attractive so we will dive deeper into the balance sheets to see if DUK is a buy right now.

The company's dividends haven't increased significantly since 2002. It has increased from 1.10 to 1.17 in the past four years. The stock declined from a high of 48 to a low of about 13 in 2003. The dividend yield consequently increased because of the stock decline. Also, the revenues aren't growing at a pace that is commensurate with the P/E. Let us take a look at the balance sheets to see how things look.

The company has lagged behind the rest of the electric utilities for the past few years. The revenue for the company has declined this year compared to the past two years. Also the utility has had declining earnings compared to the rest of the companies in the electric utilities sector. Altough the dividend yield is attractive, the price to earnings growth and P/E are a bit high for this stock given its growth prospects.
PACCAR (PCAR) Analysis Updated

We analyzed PCAR balance sheets in a blog before.

PCAR is expected to release its quarterly earnings on Tuesday. Let us consider if PCAR is a good buy at this time or not.

PCAR is already part of the SP500 index - so you likely already own it if you own any of the SP500 index funds such as IVV, SPY or VFINIX. So the question really is do you want to own the stock outside of the index funds and if this is a good time to add to PACCAR position.

As the business week article ( http://yahoo.businessweek.com/magazine/content/06_05/b3969059.htm ) mentioned, PCAR is built for the long haul. So even if the truck sales go down the coming year, if the ownership horizon is the five-ten year range it is a good buy. The stock is likely go down in the first half or the second half of 2007 as the transition to cleaner burning diesel takes place. The primary reason for the fall is going to be the reduction in special dividends and the higher P/E. Although the lower P/E is already reflected in the stock to a certain extent, don't expect a significant runup in the next two years.

The global business cycle upturn should last through 2009-2010. So, the stock should be more attractive in the coming year.

Friday, January 27, 2006

Leggett and Platt (LEG) Analysis

Leggett and Platt ( LEG ) is an old economy company. It was founded in 1883 to use bedsprings in mattresses. The business was incorporated in 1901. It has been publicly traded since the 1960's.

Today, as was the case in 1883, the company focusses on bedding products and home furnishings. One of their unit also focuses on textiles, foam and fabric components. LEG is already a part of S&P500 index.

The company has a great record with dividends and per share growth. In the last five years, the company has grown dividends at 9% a year. It has got a yield of 2.7% as of Friday's market closing.

LEGs annual revenue has increased from 1.7 billion in 1994 to 5.2 billion in 2006. Earning before income taxes has doubled between 1995 and 2005. The number of outstanding shares have increased from 167 million to 187 million in this period. The companies investment relations page is a revelation which shows the company in very good light. http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=LEG&script=2100

The company has set clear priority for its cash flow deployment. From its 10-Q statement,

Cash Flow and Capitalization

Our priorities for the use of cash, in order of importance, are:
• Fund internal growth and acquisitions
• Extend our track record of annual dividend increases
• Use remaining cash (if any) to repurchase stock

The company has been able to increase its cash flows inspite of having the same amount of revenues as in the prior year. In addition, the company has setup factories in China to supply customers who source their parts in China. ( even though it is cheaper to manufacture in the U.S ).

Thursday, January 26, 2006

In the earlier blog http://finnews.blogspot.com/2006/01/filing-taxes-in-2006.html we saw the different ways and options for filing 2005 federal income tax.

I found another way. Today, I got an e-mail from intuit to use turbo tax for free and print the tax return. If you are going to use e-file, you will end up paying $9.95 else it is free. Looks like I will be using snail mail this year for filing my returns.

Typically, it is a good idea to wait till February end. More deals will be forthcoming as we go deeper into the tax season or atleast that was the case last year!
Microsoft(MSFT) Second Quarter Analysis

Microsoft (MSFT) announced its second quarter earnings after the close of markets today. From the press releases, it appears as though Microsoft missed the revenue numbers but beat the so called consensus number by one cent. The one cent gain came from some tax benefits obtained in this specific quarter. In other words, Microsoft met the analyst estimates for this quarter.

The stock responded by trading higher in the after hours trading. The analysts have generally been bullish about this stock for this year with the anticipated launch of Windows Vista and Office 12 later this year. The company had also warned higher product launch expenses in its last yearly report to diminish the earnings this fiscal year.

Let us dive down into the balance sheets to see if one should be optimistic about this stock and how the company performed under the hood.

The operating income margin fell in this quarter compared to the last one. It fell to ~38 cents a share from 41.5 cents a share. R&D expenses increased from 1515 million to 1591 million an increase of 5% quarter over quarter. The cost of revenues also increased quarter over quarter by 83%. While part of this is attributable to the XBox 360 launch, not all the expenses are attributable to this. The operating income for the first six months of the year declined by 2% year over year. This was primarily because of the increased expenditure ( 22% year over year) in sales and marketing division. The increase in revenue was primarily driven by higher PC shipments and increase in server revenue.

Let us look at each of the segments to see how Microsoft did. We also will take a look at the impact from the 7 billion stock buy back on stock dilution.

First MSN search. MSN revenues declined year over year. Three factors contributed to the decline. The first one is the decline from internet connection revenue. The second one is the increase in headcount costs. The third factor is the ramp up to the new search hasn't been as fast as expected and the growth in search revenue hasn't been as good. ( although the traffic increased through the new MSN search. ) MSN profit declined by 55% year over year.

The MBS revenue increased year over year and finally the division turned a profit of ten million dollars. The revenue growth in MBS is increasing steadily.

The Microsoft Office family of products increased revenue by 5% year over year. The operating earnings increased at a lesser rate of 2%.

The windows server division is the current star in the company. The server division increased in revenue by 14% and the operating margins increased by 16% compared to the prior year.

The windows client revenue increased by 8% year over year but the profit margins increased by only 4%.

The mobile and embedded devices division also turned in profit for the time making up for some of the losses in home and entertainment and MSN.

In the home and entertainment division, the revenue increased by about 180 million dollars compared to the previous year's quarter. Although the revenues increased by 180 million dollars, the expenses increased faster than revenue. Microsoft's 10Q states that expenses will continue to climb faster than revenue in the coming quarters.

Microsoft spent 7.6 billion in the quarter buying back 283 million shares. However the total number of shares outstanding declined by 138 million. The rest of the money went to stem dilution in the number of shares through insider selling. The stock holder equity fell by about three billion dollars year over year though the number of outstanding shares declined by about three hundred million year over year. Investment income also increased by 40% year over year for the first six months of the year.

Overall, the positive was the increase in microsoft's revenues year over year. MBS and Mobile Devices division also turned a profit for the first time which is a good sign. Given the rate of stock buy back and the expected increase in cost in the Home and Entertainment division, it is likely that Microsoft will continue see the pattern in the growth of operating income in the next two-three quarters.

The balance sheet may have no bearing on stock performance as several analysts have rated the stock a buy. Stock performance is also based on investor psychology. If more money flows into the tech sector, Microsoft stock could be a beneficiary.

Tuesday, January 24, 2006

As a follow-up to the previous post, I found this article in Yahoo! very thorough and compelling. Last year, I had used turbo tax for free from IRS website. This year, it sure looks like I am not going to get that perk.


Sunday, January 22, 2006

Filing Taxes in 2006.

Several blogs and business week articles are discussing the availability of free or dirt cheap tax software to use this tax year. I found these two blogs useful - one from 2million and the other one from boston girl.


Good links and good pointers. I too hate paying for tax software and would rather do it by hand ( tedious ) or use software for free. You are also in the camp where doing taxes by hand induces a headache and spoils an otherwise nice weekend.

As 2million mentioned, I found that if you hold an account with Vanguard, you can do the basic federal tax and state tax for free if you hold a flagship account. I found out that as a basic mutual fund holder, I can get this package for $9.95. It is a bit on the more expensive side so I went looking at my other broker Fidelity.

From fidelity, I could only get the same deal as Vanguard. I would need to pay $9.95 for fedaral income tax return using turbo tax for the basic edition or $19.95 for the turbo tax premier version.

After failing to get a no cost deal in both places, I went www.irs.gov site. The site welcomed me with a big sign called "Check Out Free File". When checking it out, the IRS site said there is no such thing as free lunch!

Whoever said there is no such thing as a free lunch may have been right. But for millions of eligible taxpayers, with an Adjusted Gross Income of $50,000 or less, there is Free File. Free File is online tax preparation and electronic filing through a partnership agreement between the IRS and the Free File Alliance, LLC. In other words, you can e-file... free.

Since my AGI is greater than 50K, I figured the IRS option wouldn't work for me. So, checking around the site, I found http://www.irs.gov/efile/lists/0,,id=101223,00.html. This offers several tax packages none of which are free. Some have the free printing option but e-filing is going to cost money.

So I thought I would have to settle for the Free Tax Cut Standard http://www.taxcut.com suggested by 2million. Turns out that this download is not free and costs $9.95. So, my last hope to find a deal to get efiling options for free disappeared for this year.

Friday, January 20, 2006

Analysis of Yahoo!'s fourth quarter earnings

Yahoo! announced its fourth quarter results recently. The stocks took a pounding as the earnings fell short of the consensus by one cent. It is to be expected that Yahoo!'s growth is continuing to slow down in the coming year. In addition to that, Yahoo!s overture division will lose some revenue once MSN uses its adcenter software service for billing advertising. This is expected to reduce Yahoo!'s earnings a bit in the coming year.

Let us look at the growth rates from quarter to quarter and year to year to see how things are moving for Yahoo!. Year over year, the earnings growth in the final quarter is 15%. Quarter over quarter - the revenue increased by 12.8%. While some of the increase is because the December quarter is typically the best quarter and the September quarter is the slowest quarter of the year. On the positive note, the operating income margin increased from 19% in 2004 to 21% in 2005.

How does this compare to Google? We analyzed the search engine giants in three separate pieces. Links to them are noted below:


Google is a momentum stock. A lot of people have piled on to make a quick buck including some large mutual funds. Expect the mutual funds to continue to pull out while booking their profits. If profit taking continues on Monday, it can help take the air out of the bubble. Google's growth is expected to slow to 60-70% year over year. If the P/E drops to 60 or 70, we will have a price of 330 - 370. This is including the expected blockbuster earnings in the fourth quarter of this year.

Further drop in the stock on Monday is expected to drive the speculators out and make the stock more reasonably priced. Is Yahoo! cheap as Cramer is claiming? I dont think so. Yahoo! is priced fairly or slightly above the earning growth rate for the coming year. I would wait for the next couple of weeks to see how things play out before jumping in to buy any stocks. One can jump in to buy index funds if the prices fall as the P/E of S&P500 index looks reasonable at this time.

Friday, January 13, 2006

Google and Search Engine Wars - Part III

In the earlier post, we analyzed the cash flow of three search majors and found that Microsoft still has an advantage over Google. The pointer to that article is noted below.

Of late, some of the Google bears have come out of hibernation. Henry Blodget, of the infamous Amazon.com estimate has written about Google in his blog. http://money.cnn.com/2006/01/13/technology/pluggedin_fortune/index.htm. Cramer of madmoney has also been asking people to take profits and is not sounding overly optimistic about Google going beyond 500. What is the matter here? Should we be selling Google now or hold on to it?

Blodget is right about more competition and shrinking P/E for Google. However, I think his bet that click fraud will kill Google is a bit misplaced.

I signed up for Microsoft's adcenter. It looks pretty neat from the advertisers point of view. I got an offer to put up my ads on adcenter for no fee as a promotion for six months. The margins Google is going to generate from online ads will definitely deteriorate over the next two years. Microsoft doesnt have to make money from ads immediately as their other businesses are generating better profit margins than either Google or Yahoo! at the moment. Also - Microsoft's MSN portal ( stodgy one ) will continue to generate the ad dollars when the live platform begins to make money.

The bright note for Google is that adcenter wont be fully online for another six months. Also - the Google ads are placed better than adcenter ads at the moment. Google has also the advantage of getting traffic from a lot of small websites. Microsoft doesnt have a business plan for this yet. In addition, Microsoft's search is not as well known as Googles. Typing google.com is easier than typing search.msn.com in the browser. Google has also done a better job of monetizing its e-mail and other web properties better than either Yahoo! or Microsoft.

The point to note is that while Google technology is superior to Microsoft and Yahoo! today, Google by no means have monopoly power like Microsoft does with its Windows and Office software suite. Since Google doesnt have monopoly power, look for more fierce competition in this space in the next couple of years. Google will always be a viable player but Google's P/E and profit margins will likely decrease. Yahoo! will be taken over if the founders allow it to - otherwise, it will continue as an independent company. For another six-nine months, things should continue to be ok for Google and expect a bunch of upgrades from other analysts after this quarter.

Tuesday, January 10, 2006

Apple (AAPL) Analysis

Apple ( symbol AAPL ) is also known as America's company. It had fallen on hard times but after Steve Jobs has taken over, it has been a different company altogether. First, there was the iMac and then a series of i* products that came out that has altered the competitive landscape and has made Apple the de-facto leader in this space. Ten years back, one couldnt have imagined iPod replacing walkman as the music player of interest to the teenagers and the general population. However, full credit to Steve Jobs and Apple for creating and revolutionizing a market from no where. In another related news item, Apple is going to shift its processor to intel processors on its desktop, laptop computers it is going to ship. This is a significant move mainly because it can reduce the Apple price points and can gain a couple of points in terms of overall market share. This is unlikely to displace windows anytime soon mainly because of the Apple business model.

Apple also announced that it had revenues of 5.7 billion in the quarter ending in December. This is a record and is massively above the average of 3.5 billion per quarter revenue it recorded in the prior quarters. The stock has huge momentum that is expected to continue in 2006. Although the best growth of Apple is behind it, it still has some momentum this year.

In this section, we will analyze Apple's balance sheet and see how it looks like. In the tech world, earning momentum is more key than revenue and profits. While Apple is definitely a great momentum play for 2006, we will analyze the balance sheet.

The analysis is based on the most recently concluded year and it doesnt include the most recent quarter. The revenues grew from 33% from 2003 to 2004 and grew again 68% from 2004 to 2005. The momentum is very strong for revenues and looks set to grow in the 40-60% in the next one year.

Net income as percentage of revenue was 9.58% in fiscal 2005. This increased from 3.33% in 2004. Although the iMacs did well in all geographies with the exception of Japan, iPod sales topped the growth chart with 200% + growth across the world. iPod Nano continued to be popular across continents and has handily beat analyst expectations on volume shipments. Expect the iMac growth number to go up even further in 2006 because of the move to intel chips for Macintosh computers and increased market share for desktop and laptop systems. Even though the migration to intel hardware is beneficial to Apple, it likely wont be cheaper than a windows system. If anything, the Apple system would be more expensive than windows and this will translate to a better bottomline for Apple. Apple will continue to lead the iPod market with forays to video capable iPods in the coming years.

Apple currently has a P/E of 52 and Apple's growth rate is going to be far higher than 60% in terms of revenue and profits for this quarter. The way things are going, Apple is likely going to continue to beat the expectations for 2006.

The Apple come back is a great American success story and it doesnt look like it is going to stop anytime soon.
WalMart (WMT) and Amazon.com (AMZN)

This can also be termed a tale of two retailers WalMart (WMT) and Amazon.com (AMZN). Amazon has a P/E of close to 40 while WMT has a P/E of 18. In this article, we will take a look at the two stocks and see which one is showing better growth characteristics and which one is a better buy at current prices.

In recent times, both WallMart and Amazon have come under media scrutiny for different reasons. WallMart is having problems with its size and there are also questions about the effect WallMart is having on America as a whole as its world wide revenues represent about 2% of U.S GDP. Amazon was an internet darling that has fallen on hard times because of intense competition and newer technology. There are concerns that Amazon is losing market share to other more nimble competitors. Amazon is in the retailing business but is priced as an internet business with a high P/E multiple.

First, I ran streetsmart's pricecheck calculator on both the stocks. http://www.smartmoney.com/pricecheck/index.cfm?story=worksheet

For WalMart, it yielded a price of 54 in five years and for Amazon it yielded a price of 18.88 in five years. The trend for WallMart is up and for Amazon, it is down. As one cant entirely rely on automatic calculators, we will take a look at the balance sheets to see how healthy the two businesses look and if WallMart is a better buy than Amazon.com.

First WalMart. WalMart has a P/E of 18. However, year over year revenue increases at WallMart are in 9.8% range and operating income growth in the 7.4% range. Stock holders equity grew at nearly 11% rate year over year. The increase in stock holders equity was helped by stock buy backs. WalMart had an operating earning percentage of 5.37% after all expenditures. In the most recently reported quarter, International growth for WallMart was about 12% while U.S growth was close to 9%. The international revenues made up of 20% of WalMart's overall revenue.

Amazon on the other hand has faster growing sales at the rate of 25% year over year. The increase in sales this year was partly helped by the Harry Potter sale. Gross profit increased by 30% compared to the prior year. However, the operating expenses rose faster than revenue and net income decreased. The net income before income taxes decreased by approximately 11%. The earnings per share in this quarter decreased by 46%. Year over year, earnings per share declined by 34%. The amazon.com profit margins are currently at 2.74% before income taxes which is much lower than WalMart. The stock holders equity in Amazon.com increased to six million in the most recent quarter from a negative of 227 million from the same quarter last year.

Although Amazon.com sales are growing faster than WalMart, its net profit margins after expenses are lower than WalMarts. In the web, it faces intense competition from EBay, Yahoo!, Google and eventually Microsoft. Amazon.com will have to spend more to improve its technology and the value of its portal will probably continue to decline. The decline is mainly due to the ascent of the search technology. One can just for a specific book or author and can eventually find the best deal for it in the web. The ability of this technology will reduce the value of Amazon's portal which is its biggest asset. Others such as Costco, Dell and WalMart are also entering the net and are selling their wares at low cost as well.

Looking at the two retails, WalMart is the clear winner. Its P/E, profit margins, cash flow and share holder equity growth are all superior to Amazon.com. WalMart while not as cheap as Berkshire Hathaway, is clearly a better stock to own compared to Amazon.com
Amedisys Inc (AMED) Analysis

Amedisys is a company based in Louisiana that provides in home nursing service. The company operates primarily in the south and has been one of the top performing companies in the stock market. Amedisys has about two thousand five hundred employees. Amedisys is a multi-regional provider of home health care nursing services. Operating 80 home care nursing offices in the southern and southeastern US, the company provides a variety of home healthcare and outpatient surgery services. Home healthcare service includes nursing and allied health services, infusion therapy, respiratory therapy, and home medical equipment. The company also provides disease management and hospice services. Medicare, Medicaid, private insurance carriers, and other local health insurance programs pay for their clients' use of Amedisys' services.

In this section, we will analyze AMED's financials and key ratios to see if it is a worthwhile investment.

AMED has a market cap of 730 million and a trailing P/E of 25. It has had a phenomenol growth in stock price in the past one year with its one year lows at around 27.8 and highs at 47.66. The company was affected by the hurricanes and two of its centers are still not operational. Amed derives >90% of its revenue through medicare and about 7% from hospital care.

Looking at the AMED balance sheets, the operating profit margins range from 14% to 12%. In particular the operating margins have declined from 15% in three months ending in June 30th to ~12% in the quarter ending in September 30th. The year over year earnings growth is 62%. In the quarter ending on September 30th, earnings growth was close to 91% but the expenses were also high. The earnings grew by 59% but the earnings per share grew by only 23%. The earnings didnt grow as fast because of the huge dilution in shares to the tune of 24%. The share dilution is a concern as the acquisitions are typically paid in capital. From Amed's 10K statement, the number of outstanding shares increased from ~4 million in 2000 to about 15 million now. In the 10-K, the company also mentions that the stock prices could fluctuate because of the exercising of stock options, employee stock purchase plan. The number of shares not vested totals close to a million - about 6.7% of outstanding stock. It also looks as though the company does 401K matching through company stock causing further dilution. There is also a law suit against the company regarding the way the stock declined between 2000 and 2001.

The stock is currently not cheap but the company is growing very quickly. The market for the kind of service Amed is providing is expected to grow as baby boomers age. The risks to the stock value is the rate of dilution of Amed stock.

Monday, January 09, 2006

Jos B Bank Clothiers (JOSB) Analysis

Jos. A. Bank Clothiers, Inc. is a nationwide retailer of classic men’s clothing through conventional retail stores and catalog and Internet direct marketing. JOSB was mentioned by the fools (http://www.fool.com ) as one of the companies worth looking into in 2006.

In the most recent quarter ending in October 30th, JOSB had a net profit margin of 7.48%. This improved from a net profit margin of 6.22% from the year ago quarter. The sales in the most recent quarter increased by 27.84% compared to the year ago quarter. The general and administrative costs rose higher than revenue but sales and marketing costs rose slower than revenue growth. New store opening costs declined thus helping to increase the net profit margin. On the negative side, total stock holders equity increased by 18% from the year ago period.

Looking at the investor relation site of the company (http://www.josbank.com) - the analyst estimates for 2005 earnings are 2.20/share, for 2006 2.63 per/share and for 2007 it is 3.05/share. The estimates for 2007 are not solid as only one analyst is covering it at the moment. The company has about 300 stores nationwide currently and has plans to expand to about 500 stores by 2007. The company's same store profitability is increasing and the company's customers are high income households with incomes north of 100,000 dollars/year. The current P/E of the stock is around 23 slightly above the expected growth rate for the next couple of years. Given that the U.S economy is expected to do well in the next couple of years, this stock should do well.
Google Analysis - Part II

In earlier notes, we analyzed Google profit growth and compared its growth rate to other internet companies. The links to the previous articles are noted below:

Analyst upgrade of Google

A tale of three stocks - Google, Yahoo! and Microsoft

In this section, we will look at Google's profit margins to see what kind of leverage it has against Yahoo! and Microsoft in case the search wars intensify.

Googles income as percentage of revenue before income taxes is steady in 2005 between 34 and 35%. Yahoo! has income from operations of 18.9% before including other income and income taxes in the last reported quarter in 2005. Microsoft on the other hand is the most profitable business of the three with 46.7% of the revenue translating into income in its most recent quarter. It is interesting to note that Google's profitability declined from 2002 from about 42% to its current rate of 34%. The decline is most likely related to increased headcount costs in Google.

What do these numbers mean regarding competition moving forward? It gives us a good picture of the business - how well a business can convert one dollar in revenue to net income. In other words, one can measure the efficiency of a business.

Inspite of Microsoft having several newer businesses not pulling their weight and some losing money, it generates 3 billion dollars in free cash flow every quarter from operations. Google is generating about 400 million free cash flow from operations and the rate is expected to grow significantly in the next couple of years. Yahoo! is generating about 172 million free cash flow from operations, a distant third compared to Microsoft. However, Microsoft's MSN division that competes with Yahoo! and Google is not doing as well with profit margings of 15% and income of ninety million per quarter on revenues of six hundred million.

The mix will be interesting if Yahoo! is bought out by either Google or Microsoft. Yahoo! has several things to offer to either companies. Yahoo! mail is better than Googles and Yahoo! offers content. Google can benefit immensely by buying Yahoo! Microsoft's internet unit has less to gain from the acquisition as there are lot of comman services between MSN and Yahoo! in terms of what they offer. Microsoft just has to focus on improving its web services to remove clutter and make it easy to use to compete with Google. Google still leads the pack in its ability to monetize its different offerings. Microsoft has cash to burn and expect it to spend some of its cash from Office and Windows businesses to compete with Google.
Chico (CHS) Analysis

Chico's has been mentioned as a buy for 2006 by both Cramer in his mad money show as well as the fools. ( http://www.fool.com ). According to the fools, CHS has returned 17,600% since 1996. The market cap of Chico is currently at 7.78 billion and it has a P/E of 42.

Let us briefly look at Chicos business. We will then look into its balance sheets and analyze it for possible investment in 2006.

Chicos is in the specialty retailer business including women's clothing, apparel, gifts and under garments. Chicos caters primarily to baby boomer women who are thirty five or older. Chicos operates under the Chico's, White House, Black Market and Soma brands. Chicos operated 743 retail stores as of October 29, 2005 and plans to expand the retail space by 20% in 2005 and between 20-30% in 2006. The company grew same store sales by 16% year over year while opening new stores.

Chicos has consistently grown revenues year over year for the past several years. The revenues have grown from 64 million in 1997 to over a billion in 2005. The revenue growth quarter over quarter is about 4 - 6% with a yearly run rate of about 20-30%. The profit margins are in the 61-62% range. The margins have remained the same or improved inspite of investment in new stores because of improved mark up in the stores. Interestingly enough, the company said in its most recent 10-Q statement that inflation has not been a huge concern for the company.

The company is expected to increase its earnings by 37% in 2006 to 1.07/share. From the price to earnings growth point of view, the stock is not overpriced at its current price. Although retailing in general is tough and seasonal, Chicos earnings is not seasonal. Stock holder's equity increased nicely by 31% year over year. The income from operations is 23% prior to income taxes. This is very good - the comparable number for internet high flier Amazon.com is 2.75%. Amazon also has a P/E of 39 compared to 41 for Chicos.

The numbers look good for Chicos and it has a good growth story. Chicos, although not underpriced looks like a buy for 2006.

Sunday, January 08, 2006

Flash Memory and Investing in Flash Memory Companies

Flash memory is rewritable memory used in digital cameras. However, flash memory uses a lot less energy than conventional hard disks and is small, efficient. If you like iPod Nano, it also uses a flash memory stick to the tune of 4GB. The link here shows some flash memory products. http://www.galttech.com/research/computer-reviews/flash-memory.php So what is preventing the usage of flash memory sticks in PCs and laptops? Cost is the main constraint for the use of flash in PCs and laptops. However, as myriad uses crop up for flash memory in devices ranging from the cell phone to the PC, the price points are expected to drop and more usage of this technology is likely. Slashdot ( http://www.slashdot.org ) recently published an article on Flash memory where the following article from cnet was cited. (http://www.cnet.com.au/mobilecomputing/notebooks/0,39029089,40059358,00.htm)

If the days for flash memory are bright, what are the companies one could invest in to profit from this trend? Will the trend be a similar one as the hard drive manufacturers? Some companies such as Seagate ( symbol STX ) went private and re-emerged stronger and fitter in the hard disk industry. The early travails of the harddisk manufacturers is profiled in the book Innovators Dilemma. http://www.amazon.com/gp/product/0060521996/qid=1136719406/sr=8-1/ref=pd_bbs_1/104-5971529-1407923?n=507846&s=books&v=glance

In this article, we take a quick look at some of the flash memory manufacturers and the trends in this area. Some of the companies in the flash memory area are - Sandisk (SNDK), Micron Technology (MU), Lexar Media Inc ( LEXR ), Infineon, Samsung and Toshiba. Samsung mainly makes deals with OEMs and doesnt deal with retail marketing. We will analyze a couple of companies SNDK in this article.

Currently flash memory is ten to twenty times more expensive than hard disk preventing its widespread use. However, flash memory is 30 times more energy efficient than hard disk drives and its long term future looks good. It doesnt hurt that the price points for flash memory are declining while the capacity is increasing. Sandisk has published data on quarter over quarter decline in prices over the past three years in its website ( http://www.sandisk.com). While the quarter over quarter increase in memory capacity has averaged 10-40%, the prices have declined at the rate of 2 - 20%. Average card capacity has grown from 94 MB in 2002 to 514 MB today. At this rate, it will take another two/three years for this technology to become mainstream and be used in general purpose laptops and desktops.

Looking at Sandisk's balance sheet, the diving price points are not affecting the revenues. Sandisk is showing tremendous growth year over year. Revenues are growing at the rate of 27% year over year and profits are also going at a slightly faster rate 29% this year compared to last because of investment gain in foundries. Stock dilution is growing at 1.38% which is much smaller than Google. The P/E of this stock is currently at 43 which is higher than the growth rate. Currently there is a lot of buzz around flash memory makers because of the success of iPod and other electronic devices. Inspite of the falling prices, the company has been able to maintain and improve its net margin. The other competitor LEXR although growing revenues quickly is behind Sandisk. In the last quarter LEXR reported a quarterly loss mainly because of high interest expenses. LEXR has income from operations before interest payments of 1.2%. This compares to 26% earnings from operations from SanDisk. Micron Technology is also a player in this market but has very low overall profit margins in the range of 1-2%. Intel is also a player in this market but its year over year gains are flat in the flash memory segment. Of the domestic players, Sandisk with 15% profit margins is the leader of the pack. All the flash memory stocks have gone up because of the buzz around flash memory. At the moment, I like the flash memory products like the USB Flash Drive better than the flash stocks at the moment for long term investment. These stocks are good momentum plays and one can play in and out of them quickly for a quick buck or two.

Saturday, January 07, 2006

Intel (INTC) Analysis

Intel along with Microsoft has ruled the roost for quite some time as the Wintel duopoly. Both the companies are now at cross roads with rivals AMD/Sandisk and Google/Apple threatening to run away with both the revenues and limelight. In this section, let us analyze Intel and see how the balance sheet looks like and compare it to AMD to see how things will unfold for the semiconductor giant.

First let us look into the balance sheets. Intel has a healthy balance sheet and good cash flow. It has got two groups, Digital Enterprise Group and Mobility Group. The first group focusses on microprocessors and motherboard. The second group focusses on flash memory, wireless processor and chipsets. Comparing the quarter ended in July and the one in October, Intel has grown revenues by 8% quarter over quarter. The microprocessor business has increased the revenues by 6% quarter over quarter. The mobility business unit increased revenues by 12.5%.
Intel revenues increased by 17.5% year over year. The number of outstanding shares also decreased by about 300 million because of the share buy backs. The total number of outstanding shares has consistently decreased over the past few years at Intel. Long term debt has decreased year over year to 753 million from 855 million. The stock holders equity declined year over year to 36.6 billion from 38.6 billion. Despite the large increase in revenue, the diluted earnings per share increased by only 6.7% in the quarter ending in September 2005 compared to September 2004. The decrease in earnings is mainly because of increased cost structure. Year over year, the intel earnings are up by about 21%.

There are some positive factors in Intel's earnings and some not so good factors. Positive factors - increased profit margins in the microprocessor business and increase in revenue in the wireless and microprocessor business units. Apple is going to migrate to x86 chipset and usage of Intel chips should give some boost. The balance sheet and cash flow are definitely the other positives. The Q over Q revenue growth of 7.9% is definitely a good sign. The negative factors - AMD is growing 25% quarter over quarter and has a huge lead in x64 bit chipset market. Defection from key vendors such as Dell to AMD processor can cause problems to Intel. Refurbished AMD64 machines are currently available for $400=00 in Fries Electronics. As more people are going for AMD64 OS, Intel doesnt have a solution in a market that it has dominated for decades. Intel has also given up the lead on Flash memory to companies such as SanDisk as year over year revenues in this segment is pretty much flat. Intel also made a half hearted attempt in its foray in to the digital TV with the LCOS chipset.

Intel is not a cheap stock. It has a trailing P/E of 19 and forward P/E of 18. The next couple of years would be crucial for Intel. Like Microsoft, the new leadership at Intel is from the sales organization as opposed to the engineering organization. Both Microsoft and Intel have made some significant strategic blunders and need to execute flawlessly to remain competitive for the next ten years. At this time, it is better to own Intel through some ETF ( IVV, SPY )- like Spiders or Nasdaq Qubes ( QQQQ ) as opposed to owning the stock directly.
PACCAR (PCAR) Analysis

Paccar is a stock that is recommended by the Fools. ( http://www.fool.com ). Paccar is in the heavy truck manufacturing business and has been doing quite well in that industry. In this segment, we will analyze Paccar's balance sheets and see if the stock is worth investing in 2006.

MorningStar ( http://www.morningstar.com ) has a good stock analysis page that allows us to analyze the past earnings and financial statements of this stock. Let us look at some of the interesting ratios. The dividend growth in the past five years has averaged 10.9% and PCAR has a history of paying out dividends for the last forty years. However, the increase in dividends is marked by great increase in revenues and profits since 2001 which was a sequential down year for the stock. The revenues have increased from 4848 million dollars to 13612 million dollars in 2005 which is impressive. 2000 and 2001 were down years for PCAR on a sequential revenue growth point of view because of the world wide down turn following the dot com bust. Cash flow has also been increasing year over year but for a decline in 2000.

The SEC site shows the most recent quarter's results for PACCAR. http://www.sec.gov/Archives/edgar/data/75362/000110465905052547/a05-17917_110q.htm. The quarter was a strong one for PACCAR which has presence in the Americas, Europe and Asia with increase in revenues from all the locations. Revenues increased 20% year over year for PACCAR. The total number of outstanding shares in PACCAR has also decreased year over year by 3.3 million. This will contribute to earnings per share and dividends per share in the current year. So although the revenues increased by 20% year over year, earnings increased by 26% year over year. Stock holders equity also increased 7% year over year.

For 2006-2010, things should continue to look up for Paccar as world wide economic growth continues. Paccar is a well managed company and has a strong balance sheet. The stock had a down year in 2005 but has already posted 4.6% gain this year. The dividend growth is unlikely to keep its 10.9% growth rate in the future as the main contributing factor for the dividend growth has been one time special dividends. The forward P/E is also pretty attractive compared to S&P500 at around 10. So long as the economic growth remains strong around the world, demand for Paccar trucks will continue to grow.

Friday, January 06, 2006

Berkshire Hathaway (BRKA/BRKB) Analysis

There has been interest in Berkshire. Bill Gates has bought about $30million worth of shares in the open market recently. We did observe earlier that Berkshire had a strong third quarter inspite of the hurricanes. Let us do some analysis of the numbers to see how things look like and if some money should be put into Berkshire or not.

There are a couple of very good resources on the net that enables us to do this analysis. First is the berkshire hathaway website http://www.berkshirehathaway.com and the second one is the intrinsic value calculator available online http://www.creativeacademics.com/finance/IV.html. We observed Berkshire had a strong third quarter in this section. http://fininvest.blogspot.com/2005/11/berkshire-hathaway-rings-in-strong.html

First, let us check out the intrinsic value calculator. Running the calculator gives us the following values for class A share.

Optimistic Value 162473
Cost of Capital Value 126677
Conservative Value 105011
Liquidation Value 80684

The interesting price is the liquidation value as the class A shares are trading closer to that value as opposed to the Conservative Value at present. 89,900 as of this morning. At the end of 2004, the liquidation value was 76264/share. The liquidation value at present is 80684. This means that for the first nine months of 2005, the liquidation value rose by 5.7%. If the same rate holds, the year over year growth in liquidation value is 7.727%. It is likely that the liquidation value will be somewhere in the 9% range year over year. Given this, it is likely the current liquidation value of BRKA is somewhere around 83,100. BRKA ( and consequently BRKB ) is a very strong buy at prices between 83,100 and 86,000.

Growth will be higher in 2006 compared to 2005 for a couple of reasons. The interest rates from the U.S treasuries is higher in 2006 compared to 2005. In addition, the insurance premiums will be adjusted for the hurricanes. The operating revenues are growing at the rate of 7-8% year over year.

If we assume a growth rate of 10% in liquidation value, the stock will be worth about 91,500 at the end of 2006. The stock typically trades close to the conservative intrinsic value. The current intrinsic value of BRKA is 105011. If the same growth rate holds, we will have a conservative intrinsic value of 115,500 by end of 2006. This means that Berkshire has an upside in 2006.

The traditional analysts get carried away with the P/E ratios without really analyzing the underlying financials. The financials look very sound and solid. Given that it is highly unlikely that the company will ever be sold at liquidation value, it is safe to say that Berkshire provides a good safe base and alternative to SP500 index. In a diversified portfolio, one should consider having Berkshire in the mix.

Wednesday, January 04, 2006

Google at 650?

Piper Jaffray upgraded Google stock and said in a research note that Google will hit $600=00 by year end. Bear Stearns updated the stock to outperform from peer perform with a price target of $550=00 by year end. There is another analyst who put a price target of $2000=00 which projected Google getting 100 Billion in revenues!

CNBC interviewed all the three analysts this past week. The Piper Jaffray analysist said he raised the target price for Google as he didnt want to raise the target every month. The Bear Stearns analyst had done some more study and observed that Google has filed for more patents in the last nine months than it has done in its entire corporate history. His opinion is that Google's patent portfolio will protect it against a behemoth competitor such as Microsoft from trampling Google. The $2000=00 price target prediction wasnt very convincing - the analyst based his prediction on Google owning/creating content for stocks/bonds and health related issues which is not likely given its current business model.

Are the analysts right or does it look like irrational exuberance? Let us look at what the numbers tell us. I have posted a previous study of this sector - link to that study is noted below.

The growth rate from quarter to quarter and year over year is readily available at http://investor.google.com/fin_data.html.

The quarterly growth rate of 10-15% points to an annual revenue of 5.9 billion for FY05. The number of outstanding shares are increasing at the rate of 6% year over year. Let us say Google will continue to grow at 70% in 2006 and 50% in 2007. Currently the analysts are expected revenues of 9 billion for 2006 which is an under estimate. 9 Billion run rate is possible if the growth slows to 50% year over year. Looking at the quarter over quarter run rate, it looks as though the growth is slowing to the 70% range. Googles revenue is more likely to be in the 10 billion range in 2006. It is also likely that revenues will slow down to 50% year over year in 2007. The 2007 revenues are only an estimate now looking at how Yahoo!'s growth rate slowed down. This run rate will give EPS of 14 dollars a share by 2007. If share dilution is included in the EPS amount, it will be $12.5/share. If we assume the P/E multiple of 50 in January 2008, it will give us a per share value of 625.

Now this is assuming Microsoft and Yahoo! wont capture larger chunks of the market and that Google will continue to have the pricing power it has now with online ads. Expect the competition to get much fiercer in the second half of 2006 and in the first half of 2007.

While it is possible for the stock to reach $550 or even $600 this year, the future upside is going to be limited given the increasing market cap and decreasing market growth. If the stock hits $600, I would sell and take some profits. Since the analysts are underestimating the Google revenue for 2006, it is likely that Google has potential for upside. Yahoo! and Microsoft have improved their search engines and will continue to improve it moving forward. Unlike Microsoft, which virtually owns the Office and Windows market, Googles market will be fragmented and it will never be able to gain power like Microsoft does.

Tuesday, January 03, 2006

Investing $20,000 in 2006.

Do you have the problem of investing $10,000 or $20,000 in 2006? Are you looking for the best ways to allocate capital to maximize future returns? If yes, then you are in the same boat as I am. Read on...

Ben Stein wrote an article in October on a model portfolio that can weather retirement. http://finance.yahoo.com/columnist/article/yourlife/1218. I liked Ben's article and let us analyze his suggested portfolio.

30% - Spider
10% - Diamonds
15% - Small cap stocks
15% - Foreign Large Caps
10% - Emerging market funds
5% - Goldman Sachs Commodities Fund
5% - Canadian Stock Market
10% - U.S REIT funds.

While this is a great portfolio for a 100,000 or 200,000 dollar portfolio, the cost of buying the funds in a 10,000 or 20,000 dollar portfolio is rather high. If one has $2000 or less to buy an ETF or stock, the cost of trading can be quite high. ( >= .2% when trading cost is $10/trade ) In this case, one should consider low cost mutual funds through Vanguard and Fidelity.

A longer term asset allocation strategy is something one should consider in these circumstances. I like the Spiders, I would invest 5,000 or 10,000 dollars into the spiders. I like IVV ( details in http://www.amex.com ) which has the lowest expense ratio of all the spiders at 0.09%. If you go the mutual fund route, Fidelity's FSMKX has a low expense ratio of 0.1 and Vanguard's VFINIX has an expense ratio of 0.18% respectively. The difference between Fidelity and Vanguard for 10,000 dollar invested is eight dollars for every ten thousand dollars invested. I would pass on the diamonds for now as the basket is not diversified with only thirty large caps in the index.

If one bought IVV for 5000 dollars, I would buy one share of BRKB. Currently BRKB is selling for 2933 dollars. This is a stock that is selling very close to liquidation value and doesnt have any expenses associated with it. Look for another blog analyzing BRKA/BRKB soon in this forum.

I would also invest about 5,000 dollars in the emerging markets index fund - EEM. EEM has a higher expense ratio of 0.75% but so far the returns have been pretty good which more than compensates for the expense ratio. Vanguard has a VIPER in this sector with a lower expense ratio but whose returns have been lackluster compared to EEM. If you go the mutual fund route, there is a one time fee when buying and selling ( 0.5% ) that gets charged that goes into the fund. This fund goes by the ticker VEIEX. This fund sells with the ticker VWO and one can bypass the one time fees when buying the fund through the VIPERS. EEM has one year return of 33% where as VWO has an annual return of 30%.

I would then split the remaining 7,000 dollars equally between Foreign Large Caps and Canadian Stock Market Funds. EFA has an expense ratio of 0.31% and has risen by 13.4% in the past year. Given that growth is likely be stronger in the rest of the world compared to U.S, this is a fund to buy.

The canadian stock market fund was up 27.84% last year and as Ben Stein points out, 25% of Canadian companies are engaged in trading commodities. The Canadian dollar has been strengthening against the U.S dollar and continues to have the largest trade surplus with the U.S. If the U.S dollar weakens against the basket of world currencies, one would expect the loony to remain or get stronger.

Sunday, January 01, 2006

Citibank (C) Analysis

Citi is a large capitalization stock with a capitalization of 245 billion and almost 1.5 trillion dollars worth of assets under management. The stock has a P/E of 11 and a dividend yield of 3.6%. The stock price has fallen from a peak of almost 60 dollars from a couple of years. The questions are is Citi poised for a rebound and is it worth investing in 2006?

We will analyze Citi's balance sheet in two steps. First we will look at the dividends and then apply the dividend discount model to it. We also apply streetmoney's calculator for Citi. In the second step we will look into Citi's latest quarter results and analyze the trends.

Using a dividend discount model, a constant dividend growth rate of 10% and a discount rate of 8% for a period of ten years, we get an estimated stock price of $22.00. Using Smartmoney's pricecheck calculator (link http://www.smartmoney.com/pricecheck/index.cfm?story=worksheet ), we get an estimate of $70=00 in five years. This gives a compound growth rate of 7.8%/annum for Citi stock excluding dividends.

There are a couple of factors that play against the Smartmoney calculator. The first one is the law of large numbers. At this growth rate, in five years the market capitalization of Citi would be 350 billion dollars assuming organic growth without further acquisitions or stock dilution. If there are acquisitions, the market cap may be reached more quickly but the shareholders are unlikely to see any price appreciation in the stock.

Let us take a look at the latest quarter from Citi and look at the trends. On the positive note, Citi bought back 124 million shares at a cost of 5.5 billion from the open market. Management mentions that the increased filing for bankruptcy given the new law and Hurricane Katrina affected the quarter compared to the prior year. Bank of America was unaffected by these events primarily because of the low exposure it has for the credit card business.

In the global consumer business segment, Citi increased revenues by 4% year over year. Citi is expanding its presence in this segment by acquiring several banks within the U.S. One of the potential risk factors for Citi is it exposure to mortgage business. Citi has a huge exposure in this segment through the acquisition of PRMI which has a servicing portfolio of 115 billion.

In the card business, the revenues remained flat and the expenses went down by 1%. The income from the card business was lower than expected because of the bankruptcy law.

In consumer finance, revenues remained flat while operating expenses jumped by 8%. In the retail banking sector, revenues increased by 9% while operating expenses increased by 3%. Corporate and investment banking is one area where Citi did well where revenues increased by 35%. However, the operating expenses in this category also increased by 26%, a significant increase compared to other areas. Capital Markets and Banking sector also increased its revenues by 39% and transaction services by 19%. In global wealth management, the expenses increased faster than revenues causing a decrease in income year over year. The Smith Barney unit contributed 13% growth in overall revenue. There was also a one time gain by discontinued operations of about 2 billion dollars after tax.

Income from continued operations declined slightly in the September 05 quarter compared to the year ago quarter. Although the revenues increased by about 9.5%, the expenses increased faster than revenue. The decrease in the overall number of shares outstanding because of share buy backs helped increase the per share revenue by one cent for this quarter excluding one time gains. Overall, the stockholders equity increased by only 2% year over year.

From the balance sheets, overall capitalization and the dividend discount model, Bank of America looks better than Citi at the moment. It is also likely that the dividend growth won't keep on increasing the way they have in the past and are likely slow down over the next few years. Things could change over the course of the coming year where Citi can get some of its expenses under control and might be able to expand in the U.S and abroad more forcefully.